Modeling Business Cycles from New Keynesians Views using Differential Equations Structure: Dynamic Panel Approach

Abstract

This research examines business-cycle fluctuations by using Knowledge-based Economy Index (KEI). Data have been collected using consolidated method in 116 countries over the period 1990 -2012. Impact of business cycles' fluctuations has been studied according to the level of the countries' economic knowledge. In this classification, countries were divided to three categories: high, medium and low knowledge-based economies. The generalized method of moments (GMM) and system of simultaneous equations were used to estimate the models, and differential equations were applied for interpreting the results. The findings are described in three parts: top countries with high KEI scores experience decreasing and damped business cycle fluctuations. Those oscillations are convergent, and knowledge-based supply and demand in these countries are proportional. The countries with medium KEI scores have stable and iterative business cycle fluctuations, their movements are nearly convergent, and supply and demand are almost knowledge-based. The countries with low KEI scores are capable of instable and very high business cycle oscillations, and there is knowledge-based demand in these countries, but there is no appropriate supply with it, which results in divergent movements in business cycles.

Keywords

• business cycles models
• new keynesians
• differential equations
• boom
• recession